Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company was formed in January 2013 as a Nevada corporation. The original business plan of the Company was to build and sell multi-family housing projects. The Company acquired a parcel of land in Taunton, Massachusetts, from The Mazzal Trust, a trust of which the founder of the Company, Nissim Trabelsi, was the Trustee, in exchange for shares of the Company’s common stock, and began development of the project and construction of multi-family units.
Subsequently, on October 26, 2015, the Company acquired Global ITS, Inc., a Wyoming corporation (“Global”), and its wholly owned subsidiary, Znergy, Inc., a Florida corporation (“Znergy”), in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing.
On February 9, 2016, the Company agreed to sell to The Mazzal Trust the real property which the Trust had previously sold to the Company, and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust, which shares were cancelled. The Company is now focused solely on the EE marketplace. Both of these transactions are discussed in more detail below.
Recent Developments
Global ITS Transaction
Share Exchange Agreement
On October 26, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”) with Global ITS, Inc., a Wyoming corporation (“Global”), and the shareholders of Global, pursuant to which we exchanged 120,000,000 of our common shares (the “Company Shares”) for 24,000,000 Global common shares held by Global’s shareholders representing 100% of Global’s outstanding shares (the “Share Exchange”). The transaction was reported in, and the Agreement was filed as an exhibit to, a Current Report filed with the SEC on October 27, 2015.
Change in Control Transaction
On February 9, 2016, the Company, Nissim Trabelsi, Shawn Telsi, the Mazzal Living Trust, the majority shareholder of the Company (the “Trust”), and B2 Opportunity Fund, LLC, a Nevada limited liability company (“B2”), entered into an Amended Master Stock Purchase Agreement (the “Master Agreement”).
Pursuant to the Master Agreement, Mr. Trabelsi and Mr. Telsi agreed to sell all of the shares of the Company’s common stock owned by them, 45,800,000 shares and 9,500,000 shares, respectively, to B2 or B2’s designees. In connection with the Master Agreement, B2 paid $315,000 to Mr. Trabelsi for his and Mr. Telsi’s shares.
Also in connection with the Master Agreement, the Company agreed to sell to the Trust all of its real property with a carrying value of $1,897,000, and the Trust assumed the related party loan with a carrying value of $853,521 and accounts payable and accrued expenses with a carrying value of $24,500. In exchange, the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust. In connection with the execution of the Master Agreement, the Company canceled the 149,950,000 shares of common stock conveyed by the Trust.
In connection with his sale of his and Mr. Telsi’s shares, Mr. Trabelsi appointed Christopher J. Floyd to the Board of Directors of the Company and to the Board of Directors of Command Control Center Corp. (“Command Control”), a wholly owned subsidiary of the Company. Mr. Trabelsi also appointed Mr. Floyd as the CEO, CFO, and Secretary of both the Company and of Command Control. Following Mr. Trabelsi’s appointment of Mr. Floyd to the boards of directors and as an officer of the Company and Command Control, Mr. Trabelsi resigned from all positions with the Company and with Command Control, effective immediately.
Results of Operations
The Company had revenues of $428,241 and $12,240 for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company had revenues of $284,562 and $6,160 for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. Revenues in 2017 comprise LED installation projects and associated rebates from utilities while revenues in 2016 consist of consulting services.
The Company incurred costs of revenue of $173,327 and $-0- for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company incurred costs of revenue of $115,281 and $-0- for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. Costs of revenue in 2017 comprise primarily LED product and installation costs.
The Company had general and administrative expenses of $2,413,615 and $600,069 for the six-month periods ended June 30, 2017, and June 30, 2016, respectively. The Company had general and administrative expenses of $1,549,969 and $562,749 for the three-month periods ended June 30, 2017, and June 30, 2016, respectively. General and administrative expenses in 2017 comprised primarily of $1,688,021 in common stock and options issued for services, $367,662 in warrants issued in the conversion of debt, $73,566 in salaries and wages, and $48,415 in legal and auditing fees. General and administrative costs in 2016 consisted primarily of $522,401 in consulting fees and $54,730 in legal and auditing fees.
The Company had net losses of $2,158,701 and $587,829 for the six-month periods ended June 30, 2017 and June 30, 2016, respectively. The Company had net losses of $1,380,688 and $556,589 for the three-month periods ended June 30, 2017 and June 30, 2016, respectively.
Liquidity and Capital Resources
As of June 30, 2017, the Company had a working capital surplus of $837,599 with total current assets of $1,157,131 comprising $645,607 in cash, $284,043 in accounts receivable, $1,250 in prepaid expenses and $226,231 in inventory, and total current liabilities of $319,532 comprising $106,901 in accounts payable, $108,119 in accrued expenses, $3,545 in customer deposits and $100,967 in a loan from a related party. Use of cash for operating activities totaled $410,390 primarily for funding an increase in accounts receivable of $204,431 and inventory of $34,126, and for payments on accounts payable and accrued expenses of $202,401. The primary source of funds was loans from related parties in the amount of $226,750 and proceeds from the offering of our common stock in the amount of $795,000.
Going Concern Discussion
For the year ending December 31, 2016, our auditors issued an explanatory note regarding our ability to continue as a going concern. This means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next 12 months. Our auditor’s opinion is based on our suffering recurring losses. Accordingly, we must raise cash from sources other than operations. Our only other source for cash at this time is investments by third parties and loans from others in our company.
At the time of this filing, we have three officers, David Baker, our CEO, Christopher Floyd, our CFO and Secretary, and Ryan Smith, our Senior Vice President. Mr. Baker and Mr. Floyd are responsible for our managerial and organizational structure which will include preparation and implementation of disclosure and accounting controls under the Sarbanes Oxley Act of 2002. When these controls are implemented, Mr. Baker and Mr. Floyd, together with any other executive officers in place at that time, will be responsible for the administration of these controls.
As of June 30, 2017, management believes that generating revenues in the next six to twelve months is important to support our planned ongoing operations. However, we cannot guarantee that we will generate such growth. If we do not generate sufficient cash flow to support our operations over the next 12 to 18 months, we will need to raise additional capital by issuing capital stock in exchange for cash or obtain loans in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We cannot assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for us to continue as a going concern. No adjustments have been made to the financial statements to reflect our doubt to continue as a going concern.
Our management does not expect to incur significant research and development costs in 2017.
On July 22, 2017, the Company entered into a purchase agreement for a property located at 808 A South Huntington Street, Syracuse, Indiana. The agreement stipulates a purchase price of $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing. There is no interest payable on the balance due. The square footage of the building itself is approximately 2,348. The property also includes 27 storage units generating approximately $19,000 per year rental income. The Company expects to close on the property in August 2017.
Critical Accounting Policies
The Company’s most critical accounting policies include (a) use of estimates, (b) revenue recognition, (c) going concern, and (d) share based payments. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its financial statements.
(a) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates, judgments and assumptions used in these consolidated financial statements include those related to revenues, accounts receivable and related allowances, contingencies, and the fair values of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of any change in estimate.
(b) Revenue Recognition
The Company accounts for revenue using the “completed contract method” in accordance with ASC 605-35. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period but no revenues, costs or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor and allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined. A contract is considered complete when accepted by the customer. The Company quotes its customers the total costs of product installation and materials minus the expected rebates, if any, from a given utility. For projects larger than $10,000, rebates must be pre-approved by the utility.
(c) Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2017, while the Company has a working capital surplus of $837,599, the accumulated losses from operations aggregated $10,110,349 and it continues to experience operating losses. The Company intends to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2018.
The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(d) Share-Based Payments
Certain employees, officers, directors, and consultants of the Company participate in incentive plans that provide for granting stock options and performance-based awards. Time based stock options generally vest in equal increments over a two -year period and expire on the third anniversary following the date of grant. Performance-based stock options vest once the applicable performance conditions are satisfied.
The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors and consultants as compensation and benefits expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied.
The Company recognizes stock-based compensation for equity awards granted as selling, general and administrative expense in the consolidated statements of operations.
The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we have the option to delay adoption of new or revised accounting standards until those standards would otherwise apply to private companies, until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to opt out of this extended transition period. As noted, this election is irrevocable.
Our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies included in our Form 10-K filing of December 31, 2016, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09,
Revenue From Contracts With Customers
, or ASU 2014-09. Pursuant to this update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are currently effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and are to be applied retrospectively, or on a modified retrospective basis. Early application is not permitted. In July 2015, the FASB approved a one-year deferral of the effective date for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements.
In August 2014, FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, or ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard became effective in the first annual period ending after December 15, 2016. Management has evaluated the potential impact of the adoption of this standard and believes its adoption has no material impact on our consolidated statements of financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11, (“ASU 2015-11”), Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. The amendment does not apply to inventory that is measured using the last-in, first-out or the retail inventory method. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and is to be applied prospectively. Management has evaluated the impact of the adoption of this standard and believes its adoption has no material impact on our consolidated statements of financial position, results of operations or cash flows.
On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation may be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this standard did not have any effect on the Company’s financial statements.
The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Off-Balance Sheet Arrangements
None.